The impact of prudential standards on bank solvency

Recent developments in the banking regulatory environment have raised many questions about the effectiveness of prudential measures and the relevance of the legal framework in a changing financial environment. The Cooke ratio, replaced in 2003 by the McDonough ratio, has gradually established itself as an international benchmark for banking regulation. Banks with a controlled risk profile that comply with prudential standards are generally considered to be solvent. Based on a sample of ten Tunisian commercial banks over the period 2007-2015, this study analyzes the impact of compliance with prudential standards on the solvency of banking institutions. The methodology adopted is based on panel data estimates, drawing in particular on the work of Kefi and Maraghni (2011). The empirical results highlight a positive and significant effect of the liquidity ratio, the interest rate risk ratio and profitability measured by the